Spotting Recessions and Bear markets: Schannep Recession Indicator vs. Sahm rule

Which one is even better? Spoiler alert: Schannep's

The "Sahm Rule" is a well-known recession indicator created by Claudia Sahm, an economist who worked at the Federal Reserve. This rule identifies the early stages of a recession when the three-month moving average of the U.S. unemployment rate rises by half a percentage point or more above the lowest three-month moving average unemployment rate from the previous 12 months.

However, another lesser-known recession indicator with a nearly perfect track record was created almost 20 years before the Sahm Rule. This is the Schannep Recession Indicator. Despite its accuracy, it hasn't received as much attention because its creator did not work for the Federal Reserve. You can learn more about it here:

https://schannep.com/

Key Differences Between the Indicators

1.    Reference Period for the Lowest Unemployment Rate:

Sahm Rule: Uses the lowest three-month moving average unemployment rate from the previous 12 months.
Schannep’s Indicator: Uses the absolute lowest unemployment average without the 12-month restriction.

2.    Threshold for the Alert:

Sahm Rule: Triggers an alert when the unemployment rate increases by 0.5 percentage points above the reference low.
Schannep’s Indicator: Triggers an alert when the unemployment rate increases by 0.4 percentage points above the reference low.

Why It Matters

Schannep’s Indicator has successfully signaled all 13 of the last recessions, with 10 of these recessions followed by a bear market. Subscribers to our newsletter know how to trade and adjust their portfolios before the storm hits.

This impeccable record highlights the importance of closely monitoring the unemployment rate as a critical economic indicator. By understanding and comparing these tools, investors and policymakers can better anticipate economic downturns and make informed decisions.

Sincerely,

Manuel Blay

Editor of thedowtheory.com